Friday, March 12, 2010

When government revenues drop during economic downturns, there are only three choices government officials have at the state and local levels. They cannot print money so they are left with reducing spending, raising taxes, or borrowing. Raising taxes is the worst option, with borrowing a close second.

Raising taxes assaults the very marrow of the economy; draining resources from the private sector at a time when it can least afford the loss. Borrowing money means an uncertain future burden. Both options make it harder to weather future economic storms. Right now, the state is spending $700 million more each month than it is collecting in tax revenue. All levels of Arizona government have a combined $41 billion in bonded debt.

Yet, many in government seem unconcerned. Everywhere one turns, new taxes are proposed. On Tuesday, Scottsdale and Tempe voters approved higher taxes on hotel room rentals. Phoenix just imposed a 2 percent food tax. The legislature is considering raising car rental taxes to pay for a new spring training stadium for the Chicago Cubs. The legislature also wants to raise license plate fees. Tucson is pondering a number of potential tax increases.

On May 18, voters across Arizona will consider an 18 percent increase in the state sales tax. Studies show that raising the sales tax by 18 percent will cut the state's real economic output by $1.2 billion and that Arizonans will see their total after-tax income, already hit hard by recession, fall by an average of $300 per household.

What's more, these proposals don't take into account that the state's property taxes went up this year, or the electricity tax passed by the Corporation Commission a few years ago.

This state has lost more than 10 percent of its private employment compared to its peak. State and local governments together have lost less than 6 percent of their workforces. The capacity of the private sector to pay higher taxes is at the breaking point. Even with an economic recovery, increased taxes will only feed an even bigger government that will be that much harder to finance in the next inevitable recession.

For now and for the future, reducing government spending is the only principled solution to the problem of shrinking government revenue.

Dr. Byron Schlomach is an economist and the director of the Center for Economic Prosperity at the Goldwater Institute.